Hercules Workout World gains a client who prepays $ 660 for a package of six physical training sessions. Hercules Workout World collects the $ 660 in advance and will provide the training later. After four training sessions, what should Hercules Workout World report on its income statement assuming it uses the accrual basis accounting method? A. Service revenue of $ 660 B. Cash of $ 220 C. Unearned service revenue of $ 440

Question

Victoria

Business

26 October, 08:57

Hercules Workout World gains a client who prepays $ 660 for a package of six physical training sessions. Hercules Workout World collects the $ 660 in advance and will provide the training later. After four training sessions, what should Hercules Workout World report on its income statement assuming it uses the accrual basis accounting method? A. Service revenue of $ 660 B. Cash of $ 220 C. Unearned service revenue of $ 440

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Eduardo · Answer 1

Service revenue of $ 440

Explanation:

When the customer prepays, the revenue is yet to be earned hence the entries required would be a debit to cash account and a credit to unearned or deferred revenue.

As the service is rendered and revenue is earned, debit the deferred revenue account and credit the revenue account with the amount earned.

Since $660 was collected for 6 training sessions

Revenue from a training session

= 1/6 * $660

= $110

After 4 training sessions, revenue earned and to be recognized in the income statement

= 4 * $110

= $440